Early to Invest- Key to Financial Happiness

(This appears in some editions of Deccan Chronicle, today. Make sure you pass the message to your children. And if you have very young children, leave them a good inheritance without much risk)

Money & Life

There is a wonderful and thought-provoking article in New York Times that every young person should read.  Here is a link to that



Financial planning may help you to understand some numbers based on a whole lot of assumptions. However, the bigger thing here is lifestyle planning. The author talks about saving more by spending less. Most good planners would also tell you the same thing.

I feel it would be nice if we have a breed of ‘LIFE COACH” that can help us with our emotional aspects related to finances also. Savings and investment are a function of attitude. It is good to pause once in while and take stock of our life goals and not just the money part of it.


Lifestyle is a personal choice. However, often, we are thrust headlong in to a lifestyle, without pausing to think. We are driven by media, advertising and what we see around us. It is a rat race where we want to have one better than what the neighbor has. I do not want to sound judgmental. What I want to point out is that financial planning should also include “lifestyle” options. What each lifestyle can do to our finances and our retirement plans. I will illustrate that with a simple example:


  1. Save 10,000 p.a. for 40 years.          End of 40th year     Amount is Rs.28.00 lakh appr
  2. Save 10,000 p.a from 11th t0 40 yrs End of 40th year    Amount is Rs.12.25 lakh appr
  3. Save 10,000 p.a from 1-10 and forget End of 40th year Amount is Rs.14 lakh appr.
  4. To get 14 lakh at end of 40th year, you should save almost 90,000 p.a if you start after the first 30 years have gone by.

I have used a very modest sum of 10,000 per year.

How many of us sit down to think? We are more worried about the next iphone to buy or the down payment on the new car we want to get. I am not against this consumption. I think we owe it to ourselves to live well. I am pointing out the advantages of saving early in life, before our propensity to save is reduced with life’s responsibilities.

The numbers above assume a compounded annual return of EIGHT percent (8% p.a.). If it is ten percent, the 28 lakh would become Rs.48 lakh!!. The difference of 2% compounded over the 40 years magnifies the final amount almost by 100%.

The early years are wonderful years to put a foundation in place. If you have to give a gift of financial freedom to your child (debatable whether it is a good thing) put in a 10,000 monthly SIP in any ETF for the first ten years of his life. Pass it on to him only when he is 50. Probably he could retire. At 10% p.a. this will result in a little over three crore rupees on the ‘child’s’ 50th birthday.

The earlier you start your savings, the sooner you can hang up your boots. Of course, you may love what you are doing and want to be at it for as long as you want. That is a matter of choice. If you do not start in time to build your pool of savings, you may not be left with a choice to work or not.

You will also find that the later you start your savings plan, you will start worrying more and more about risk. Investing in bank deposits may be safe, but it is not tax efficient and consequently it will not beat inflation. Equities capture this in their growth. And equities need time to grow. If I start my savings and investment plan at fifty, with nothing to fall back on, I will be afraid to look at stocks. I will be more worried about preserving my money because I know that my future earning period is limited. On the other hand, if I buy shares when I am twenty-five, I can afford to be wrong.

The trouble with us is we do not know when to say ‘enough’. Lifestyle choices and ambitions are often in conflict with financial freedom. If you understand the magic of compounding, your choices will be easy to make.

I can write a million articles. You can read a million books. You can talk to hundred advisors. Nothing matters. YOU have to take the first step. The first step that you take towards a planned savings and investment regimen will reduce your worries dramatically. While you are working, put your money to work. So many things in life get easier.  Happy Investing.





(This appears in today’s Deccan Chronicle. Some thoughts on why we need help with investing and why it should be paid and not free)

( http://epaper.deccanchronicle.com/articledetailpage.aspx?id=11414616 )



At a recent conference that I was moderating, a member of the audience raised the following question:

“Sir, we get SMS saying that they are SEBI registered investment advisors. We pay Rs.25,000 for a single stock recommendation and then we find that the stock does not do well. Will SEBI take action against this?”

I almost fell out of my chair laughing.  The gentleman from SEBI was more polite and made a very succinct remark “When intellect gives in to greed, the outcome is not pleasant”.

The label of a SEBI advisor simply means that he probably has the legal qualifications as prescribed by SEBI and has passed the requisite exams. Or he may just be faking that he is qualified. Many of them mislead you by saying “SEBI approved”. Well, SEBI does not approve of anyone or anything. Get that clear. He is merely qualified to put the lable of the term ‘advisor’. He is just a ‘qualified’ advisor. SEBI does not give us any assurance of his abilities. Just like a medical practitioner is allowed to put the term “doctor” before his name because he has passed the exams etc, does it mean that he can identify and treat everything? There are good doctors and not so good doctors. Same is the case for every profession.

Why is it that we are so ready to part with our money to some unknown person? And back that advice with more money by chasing that idea? Just ask yourself one question. If that gentleman was so good, why is he not holidaying in Cannes or Monaco by simply multiplying his money? The very fact that he is selling this advice means that the probability for the advice to work favourably is limited to 50%. While I may think I am the best analyst in the world, there is not guarantee that the stocks I pick will fly on the bourses. I or anyone else has no clue about what the stock prices will be in the future.

We put our money at risk. It is best that we UNDERSTAND the risks first rather than simply look at the upside. Remember that prices can move in two directions. It is not within the control of any one of us.

Advisors should be chosen with care. You could opt for someone within your known circles. That generally is the best. Someone who can give you time. Of course, the caveat is that we pay for advise. If there are pure ‘advise’ only, no execution, that may be an option.

On the equities side, there are some good independent research firms emerging. They will have a ‘subscription’ model.  Check out the background of the people who run it.  Important thing is that we manage our risks well. Simple things like never putting all our money in one idea (unless you are backing something entrepreneurial on your own) and after understanding the recommendation a bit. Blind trust is never good.

In fact, most good advisors will either give you a model portfolio or stock specific advice. And many of them do tell you not to put all in one basket. Diversification of risk is important, whether you get written advice or not.

There are some ‘advisors’ who also act as distributors. So long as they tell you that they make a commission by selling you a product, it is clean. Of course, it is possible that like in insurance, they will only push what they sell. That can be injurious to you and not get you the best possible. Pure fees only advisories are the ones to seek out.

How much is fair payment? A Rs.50,000 annual fee may be large for someone whose investment size if five to ten lakh. The problem is that a good advisor needs a minimum remuneration for an idea. So for those who cannot afford to buy advise, it is possible that you could form a serious investment group and pool in your resources. Free advice is generally very expensive in the long run. Do not chase every newsletter. Go for someone who is happy to share his/her entire record with you as a matter or routine. Many will tell you only about the ‘right’ recommendations and be quiet on the wrong ones.

One thing to remember is that investments in equities needs patience. Unless of course you are buy very short term trading ideas based on technicals or astrology or some such thing. Then you are on your own. Do not blame SEBI. I do not know if SEBI has come out with any qualifying examination for ‘technical’ analysts.

R Balakrishnan





Investing – Picking themes

Some thoughts on creating wealth- Putting money behind consumption themes- If we know where money is being spent, it should lead us to making money too.

(This appears in Deccan Chronicle- yesterday/today)


IKEA, a global furniture seller, opened his shop in Hyderabad this week. The videos of the crowds tell us a story. That we Indians are compulsive shoppers. Over the last few years, we have seen an explosion in retail shopping. Whether it be malls or online or offline. A new comer like Patanjali has become a challenger to the Levers and the Nestles. And the other thing to notice is that new comers have not, as a group, taken away size from existing players. They have added to the market size.

As per reports, the ‘average’ per capita of an Indian is Rs.80,000 per year. For a family of four, it is Rs.4 lakh per year. Of course, the average is misleading. Maybe half our population is below this line. However, each day, more and more people are moving up in terms of per capita income. We are an aspiring population.

The inequalities also mean that more and more money is being ‘saved’ or ‘invested’. The flow of monthly “SIP” money in to Mutual Funds is at record levels. NBFCs that are lending in spaces like Housing Loans, personal loans, gold loans are growing at furious rates. Branded food outlets are also expanding at exponential  rates. Everyone is fighting for the money from the consumer. An extra rupee snatched from each one of us is Rs.130 crores!

There are two things to consider-  One is that there is an overall increase in disposable income. The second and more important thing is that the inequalities are also increasing. Thus, the spending increase will be more visible at the upper end. At the lower end, growth is dissipated due to the presence of the unorganized sector, leading to fragmentation. While nominal per capita income growth will be in two digits, we do not see the consumer giants report volume growth in two digits. There are also sectors where we are all spending big money, but companies are struggling- Telecom, airlines, etc- This is because there is regulatory intervention of a high magnitude. Wherever there are regulatory uncertainties, it is best to keep away.

At the upper end- beneficiaries seem to be in the high spend zones- luxury cars, jewellery, up market brands. At the middle, consumption and white goods seem to be the big winners. In many of these industries or businesses, the road to profits is long. Many miles to go. Thus, for most companies, staying the course is key.

Thus, when it comes to investing, the logical choice seems to be to pick up stocks from the “b2c” segment. It could be automobiles to toothpaste. Or lenders like Banks and finance companies. Housing finance companies, building materials. It is a huge space.

The one thing that strikes us that all the listed stocks in this space appear to be very expensive. However, those of us who thought of buying them at better or cheaper valuations are still waiting since long. There seems to be a premium attached to proven quality. The quality is also reflected in the high ROEs the companies earn and the regular dividend payouts, low to no debt and strong balance sheets.

With stocks remaining expensive in this sector, how does one build a portfolio of this over time? I believe that this sector can create a portfolio that can preserve your wealth and also beat inflation. We can pick from sectors like FMCG, Housing Finance, Banks, Building Materials, Automobiles, Branded apparel etc.  Once we start to make a list, it starts to grow and will rival a mutual fund portfolio. However, if we want to limit the number to fifteen or twenty, then the task is somewhat easier. Simply pick two from each segment. The two that have delivered the highest average ROE over the last ten years and in the last three years, have not seen a big decline in ROE.

This can be a ‘CORE’ portfolio. As regards timing, it is not easy. These stocks will not run away like some speculatives nor will crash. In a sense, they will give you ten to fifteen percent compounding over twenty years. One way to build such a portfolio would be to start a SIP for ten years or more in those stocks. I would put equal rupee amounts in each of them. If I have much smaller amounts at my disposal, it may make sense to stick to a large cap mutual fund. And one more thing would be to add to your stocks when there is bad news and the price reacts in a manner that is not justified.

And once you put this plan in place, additional moneys that you have could be used to bet on stocks that are still young and you become like a ‘venture capital’ investor in these.




This is RBI helping folks out with financial literacy. COMPLIMENTS TO RBI.




 Financial Education and RBI
RajuFinancial Inclusion and Education are two important elements in the Reserve Bank of India’s developmental role. Towards this, it has created critical volume of literature and has uploaded on its website in 13 languages for banks and other stakeholders to download and use. The aim of this initiative is to create awareness about financial products and services, good financial practices, going digital and consumer protection.

Financial Literacy Week is being observed during June 4-8, 2018 with the theme of customer protection. The week will focus on four consumer protection messages viz. 1. Know your Liability for unauthorized electronic banking transaction 2. Banking Ombudsman 3. Good practices for a safe digital banking experience and 4. Risk Vs Return. The promotional material for the Financial Literacy Week has been uploaded in the Downloads tab under the heading “Financial Literacy Week 2018”

The booklet FAME (Financial Awareness Messages) provides basic financial literacy messages for the information of general public. It contains eleven institution/product neutral financial awareness messages, such as, documents to be submitted while opening a bank account (KYC), importance of budgeting, saving and responsible borrowing, maintaining a good credit score by repaying loans on time, banking at doorstep or at vicinity, knowing how to lodge complaints at the bank and the Banking Ombudsman, usage of electronic remittances, investing money only in registered entities, etc.

 The RBI has developed tailored financial literacy content for five target groups’ viz. FarmersSmall entrepreneursSchool childrenSelf Help Groups and Senior Citizens that can be used by the trainers in financial literacy programmes.

Audio visuals have been designed for the benefit of general public on topics relating to Financial Literacy. These Audio visuals are on “Basic Financial Literacy“, “Unified Payments Interface” and “Going Digital“.

UPI_AdUSSD_AdTwo posters – UPI (Unified Payment Interface) and *99# (Unstructured Supplementary Service Data) – explained these new concepts in digital payments space.

RajuMoneyKumarAdEarlier, the Reserve Bank had published a series of pictorial booklets. Under the‘Raju’ title, it created literature on the habit of savings and banking concepts. The ‘Money Kumar’ series simultaneously explained the role and functions of the Reserve Bank.

All this is available in 13 regional Indian languages and can be easily downloaded at ‘Downloads’ tab.

Make in India- The search for ‘large’ investments by Funds

Market depth on the bourses has been a matter of serious concern. Every MF seems to have this problem as domestic savers pour money in. One way is to get the foreign companies that do business, to list here- Surely, if the govt wants, it can be done


(This appeared first in Moneylife)

Keeping the (Market Wealth) in India

Our honourable prime minister Narendra Modi is passionate about ‘Make in India’. Government policies are getting fine-tuned to make this easy. Today, I want to touch on a topic that is dear to my heart. About encouraging Indians to create wealth from the massive spending and growth that is happening in India. While our gross domestic product (GDP) may be growing in real terms at 6%-7% (implying a nominal growth in double-digit terms, given that inflation is around 4%-5%), many businesses are making money hand over fist and shareholders are creating wealth at a much faster pace.
The Indian consumer is the most sought after one today. Whether it is Google or Microsoft or Unilever or Nestlé or Apple, everyone is wooing Indian consumers. Indian consumers are giving a lot of boost to the share prices of all these companies. Then you pause. All this money is spent by the Indians. Who gains? Who owns Google or Microsoft? It is clearly the Americans who own bulk of the shares. You and I cannot buy five shares in Google as easily as we can buy five shares in Bajaj Auto or Maruti. In fact, we won’t be able to buy any with our national currency!
Now think of the opposite. Who owns top Indian companies? The fact is that HDFC (Housing Development Finance Corporation), HDFC Bank and ICICI Bank are overwhelmingly owned by foreign investors. In some cases, they hold 74% shares. Uday Kotak is probably India’s finest banker and sharpest brain. Read what he has to say here: https://tinyurl.com/yb6cu8bp He rightly points out that companies that need capital can find it from Indians. When that is possible, why do companies like HDFC have to raise money from foreigners?
Indeed, we have a problem of plenty. Indian mutual funds are flush with money and not finding enough investment avenues. They need quality investments. Why give this up to foreigners? He notes that HDFC is today owned 80% by foreigners! And 100% of the money is made from Indians and made in India! However, the wealth from this gets created abroad. Google, today, counts on India for its next big growth opportunity. Probably, companies like Google also do a lot of their development work in India. India has the fastest growing Internet market in the world. But then, who owns the wealth that gets created from this? Indians? Think again.
My friend, Umesh Kudalkar, is an investor and an analyst par excellence. He has sharp insights on most companies and also sees things from the top. He has made a very passionate argument which calls for listing of foreign companies in India, if they wish to do business here. While India needs capital to grow, India also has capital that seeks investment opportunities. I urge you to read his arguments for “Listing in India” at https://tinyurl.com/yccf2xvv.  To know more about Umesh, check https://www.linkedin.com/in/umesh-kudalkar-9776701b/. I fully endorse his views. Yes, there could be legal or technical issues which may need to be addressed before we can actually commence listing and trading of global securities on our bourses. If Hong Kong or Japan or European countries can invest in shares in global companies, we should also be doing that.
Coming back to fund-raising by Indian companies, the government needs to revisit the provisions that permit companies to raise equity through private placement with select investors. This provision was introduced in an era when we widely believed that domestic shareholders would not participate in offerings of new shares at prices prevailing in the secondary markets. Today, things are different. Domestic money is in plentiful supply and looking for new investment options. It would be perfect if the clause were scrapped. However, markets are fickle and investor sentiments change. In order to help both, the government can insist that all new offerings should be compulsorily through rights issues (the principle of not diluting existing shareholders). Anything unsubscribed could be given to domestic mutual funds first and then to the horde of registered foreign institutional investors (FIIs). This can be done easily without any delay, as technology is an enabler of instant decisions.
There was a time when we needed FIIs. India was short of capital and FIIs were important because they pumped in billions of dollars every year. Those days are over. Already, investments by Indian mutual funds have overtaken FII investments. Much as we need their money, they also need investment options. China allowed foreigners to buy only in a graduated manner, limiting the number of companies, imposing several restrictions and so on. Here, we have opened our capital markets too much, too soon.
Last week, Indian Railways Finance Corporation launched a bond listing on the India INX. It is an initiative by the BSE, to enable foreigners to trade round the clock. In the first phase, it proposes to commence trading in equity derivatives, currency derivatives, commodity derivatives including index and stocks. Subsequently, depository receipts and bonds would be offered, once the required infrastructure for these is in place. The technology offerings at India INX would facilitate co-location of members in its own data centre at GIFT City (Ahmedabad) as well as provide high-frequency trading. It is an attempt to compete with the likes of Singapore and Hong Kong. It is only fair that foreign securities are available for trading for Indians.
Domestic companies’ shares are creating wealth for foreigners. And foreign companies are creating wealth for their shareholders by selling to Indian consumers. And, we, Indians are getting excluded. As Umesh Kudalkar mentions in his article, every government does things to encourage domestic participation. What are we doing? We are permitting foreign banks to thrive here, without being incorporated or listed here. I am sure that if we ask them to incorporate locally and get listed here, they will comply; no one will leave the country. On the other hand, we are seeing a bank like HDFC Bank being owned predominantly by foreigners and creating wealth for them. We can insist on the foreign companies to either list and offer shares to Indian investors and/or insist on their shares being traded within India, enabling Indians to buy those shares.
Indian investors have totally been left out of the wealth created by companies like Google, Apple, Microsoft, etc, while being big contributors to their profits. Our digital payment rewards are going to Visa and MasterCard. Here, if we cannot compete with them, at least owning their shares should be enabled. India has been perennially short of capital. It is only now that wealth creation is possible as entrepreneurs get rewards from the capital markets. By opening more avenues for Indian investors, this process can be accelerated. More capital means more risk-taking can happen. Ultimately, this will all go to increase the ‘Make in India’ pie.
Our capital market regulations are among the best in the world. In many cases, we are ahead of Western regulators when it comes to disclosure regulations. However, we seem to have had a blind spot when it comes to thinking about our own interests. We have a colonial mind-set. We still want to ‘impress’ and ‘favour’ the foreigner. Indeed, at the time of writing, there is a speculative news report that Indian government may allow 100% FDI in banks. I would be happy to see the government and the regulators take steps to get us freedom from the second colonial conquest, that of our capital markets.

“Financial” Parenting- You owe something to your children

(I had come across this wonderful term in the late nineties, in some research publication of Morgan Stanley Dean Witter. The topic was of educating children on finances. And also the dilemma of how will you motivate children who will want for nothing, whose errors are easily covered up financially and who have no need to work for a living. This piece of mine talks about some experiences I had.. This was published in the Deccan Chronicle of 29/30 July 2018)


 Our academics are interesting. We learn so many subjects and then finally land up in a job of profession where just one segment or fraction is actually useful. And Indian kids have been brought up to think that if one does badly in the holy PCM (Physics, Chemistry and Mathematics) one is a duffer. Everything is focused on earning money, providing for the future and improve the standard of living. Once we are past the academia, it is money that plays the biggest part in our life.

And our education system does nothing to help us. As we grow in to our lives, focused on our career and on money, we pay little attention to what we do with our money and what are the possibilities, the risks, the opportunities. In the wonderful book, “Rich Dad Poor Dad”, Robert Kiyosaki says:

“If you are going to build the Empire State Building, the first thing you need to do is to dig a deep hole and pour a strong foundation. If you are going to build a home in the suburbs, all you need to do is pour a 6-inch slab of concrete. Most people, in their drive to get rich, are trying to build an Empire State Building on a 6-inch slab”.

Investment and money matters have to be taught when one is a child. By the time one grows up, that lesson has less impact. If you read about Warren Buffett, he started to buy shares when he was eleven! He was handling money, earning money even before then!. He could build the tallest Empire State Building ever, in terms of wealth.

Every child matures at a different rate. Start them young on matters of money. This will also get rid of their fear of numbers or ‘innumeracy” which afflicts a vast majority of us. Generations have progressed from lack of money to becoming wealthy families. There is a natural tendency to protect the young. We want to ensure that they are not hurt by failures. We are around to do their every bidding. Every wish and want of theirs is fulfilled. With so much going for them, what will be their motivation in life? What will be their reason or excuse for a meaningful or purposeful life?

Our education system is unfortunately in a permanent limbo between politicians at the states and the Centre. Thus, any real life lessons will have to come from parents. It can realistically commence from that generation of parents who have fulfilled the common needs like housing and are giving their children a good education. Start the children early with money. While my father had not bought a house and we were in poor circumstances (even the five rupees a month fees was always in arrears) he taught me the importance of money. I was given the monthly cash and told to manage the household. My mom was the guide to spending frugally. It was when I learnt tremendous respect for my mother who seemed to make the rupee stretch so far. I had to keep tabs on expenses and my dad would keep discussing with me. My dad had a failing business and I learnt to write books of accounts while still in school.

Each one of us should start our child early.  Maybe my first salary was a princely sum of Rs.500/- and it was closer to my retirement that I started having ‘surplus’ cash flow to invest. However, I am sure that my children’s’ first paycheck would be bigger than my last one. If I have given them everything, then the money will be burnt in consumption. The fault will not be theirs. It will be mine for not having taught them the ‘value’ of money. Today, if I take a ‘dipstick’ survey of teenagers, I am sure that nearly ninety percent will not know of ‘compound’ interest! We parents have sheltered them from all bother.

Discussing money with children, explaining to them the basics of a bank, a fixed deposit, a mutual fund, of shares etc are good things. You could give them money to buy shares. No better motivation if you can afford it. However, you will fail if you just give them the money and not discuss outcomes. If you are shy or innumerate yourself, have a good friend teach them the basics. Let them handle the household budget. Pay them for meeting goals.
The US has DECA (https://en.wikipedia.org/wiki/DECA_(organization) ) . We do not have anything like this for children. They also have the ‘stock market game’ (https://www.stockmarketgame.org/ ). I even recall the US Federal Reserve had comic books outlining the workings of the banking system!!  These are wonderful initiatives that help in financial literacy. Till such time we have such things in India, parents will have to be the financial teachers for their children. Most of us are financially illiterate. Let us not condemn our children to continuing the tradition.

“Singing in the Lifeboat” – A book review

(If I had never met with Ian Bain, I do not think I would have read this book. It was my good fortune to have met Ian. Apart from being a fabulous host, he is also a great story teller. Ian has had a fabulous life- Moving from town to town and school to school in Scotland, not finishing his school, working for a newspaper at 15 and then a sailor, a smuggler, a sub editor , an entrepreneur and then treading the path spiritual. All this in one lifetime! I will wait for more stories from Ian)

Ian Bain has given us a glimpse in to his Life. From a disturbed childhood, lack of ‘formal’ education to becoming a sailor, a journalist, a successful public relations entrepreneur … his life is anything but ordinary.

Living for the day, Ian moves from country to country, job to job, has his battles with the bottle and finally finds peace in his spiritual pursuit.

The book is fast paced. Makes you want to know what happens next to Ian before you can put the book down.

The writing is easy, and Ian succeeds in putting a smile on the reader’s face even as you go along the most turbulent of his life phases.

A truly remarkable journey in a single life. Not many of us are privileged to have so much excitement and learning.

The title is very apt. Ian moves from one potential shipwreck to another all the while, without losing his charm or cheer. If I change the timelines of history, I will say that Robert Bruce was inspired by Ian.

I am sure Ian must have had his days of gloom, but as I read the book, they disappear among the words and the turning of the pages.

Ian’s editorial skills are imprinted across the book. He wants to make sure that the reader is not burdened with any boredom. He has succeeded. I finished the book in two sessions.

In this book, are hidden many more books. Ian’s time line spans a period that has seen remarkable changes. And Ian has been in ‘happening’ places all along. As a reader, I would love to have Ian tell me stories of Dubai in 80s, of ocean voyages, of his bootlegging booze to Bombay, the Simla he saw that was frozen in time, the America that he experienced. He is a story teller nonpareil. He makes fishing sound interesting even to a vegetarian like me.

I am fortunate enough to have met Ian. Ian and Sharadha are wonderful people and hosts that did not make us feel like guests. And Leela, another wonderful host at their place.

Ian and Sharadha’s tryst with spirituality and healing tops off the book. Even here, it is ‘giving’ and doing good. Good at heart and at hearth, I wish them forever years of happiness and togetherness.

I am waiting for his next book on Baba, the real Slumdog… And then on Leela… And then on….

Go get a copy of the book. You will not regret it.

This is where you could get one:




Of Index Funds and ETFs— Some thoughts

(This appears in today’s edition/s of Deccan Chronicle)

(http://epaper.deccanchronicle.com/articledetailpage.aspx?id=11142075 )


 Globally, it is tough for mutual funds to beat the performance of broad indices. Yes, there would be a handful that beat the index, but looking at the rearview mirror, picking them up, can be hazardous.

In India, our Index is not the best representative of the market. If we take the current market, over 40% of our index weight comes from one sector- Banking & Finance!.

This is what our NIFTY looked like a few days ago:

nifty july18

(Source: https://www.nseindia.com/content/indices/ind_nifty50.pdf)

 One sector keeps pulling the broad indices. And individual stocks’ weights also can distort the picture. Every fund manager would be overweight or underweight each of them according to his judgement and expectations. However, collectively, all the investors move the stocks different to what rational expectations are. In addition, a fund will not limit its portfolio to stocks out of an index (unless it is an index fund). As I am writing this, the NIFTY is headed towards an all time high driven by stock prices of some private banks. A mutual fund manager would use his discretion and some may be of the view that the private bank stocks are expensive and put money in some other place where they find value. They cannot be chasing momentum.

A mutual fund manager tries to pick value, growth and future performance. In the early days in India, you could beat the indices easily as the index had a lot of companies that were boring or dying companies. And a lot of undiscovered opportunities were waiting. Today, the index has become packed with high momentum stocks and the chances of new discoveries has reduced due to the number of investors as well as the easy availability of information. In addition, the promoters are aware of the wealth creation abilities of the stock markets and are always eager to spread their story.  All this makes it difficult for a mutual fund manager to keep constantly beating the indices.

It is said that globally less than five percent of mutual funds beat the broad indices. This will happen in India also.

This makes a strong case for ‘passive’ investing through index funds. You know what you are in for. You could either do a SIP or keep making lump sum purchases when you have money. Personally, I would recommend a SIP process and when we do get some extra moneys, try for some direct equity if so inclined.

The exchanges keep revamping their indices to keep adding the big names and trim the ones that do not deliver. In a sense a passive fund management is happening behind the scenes. If you look at the Sensex of just 30 stocks ( the BSE Sensex was created sometime in 1980-81 with 1978 as the base year). Stocks that were in the Sensex include names like ACC Ltd, Bombay Dyeing, Premier Automobiles (defunct), Nirlon Ltd, Centure Textiles, Proctor & Gamble, Mukand Ltd, Tata Chemicals etc… Thus, the Sensex itself keeps evolving and tries to include companies that are becoming bigger and excluding companies that do not keep pace. And including a company or dropping a company from an Index has its own consequences. Many global funds are happy with passive tracking and will mimic the index. All index funds will sell the stocks that go out of an index and buy the new entrant.

Thus, the broad indices, while they will have their excesses either way ( I seriously doubt if the index will ever be at a perfectly fair valuation ever… Everyone’s perception is different and funds flows in to markets are a big determinant of the indices) are a fairly good way to participate in the stock markets. .

And we will have two choices- Either use an Exchange Traded Fund (ETF) or an “Index Fund” floated by a Mutual Fund. Personally, I would pick an ETF for the simple reason that costs are lower than in an Index Fund. The procedure for buying and selling is different. ETFs are bought and sold like stocks. So it will call for an action on your part to make a buy. You could easily set up a SIP with your broker on most online platforms for stock trading.

If I do not have the time and the skills for direct equities, I would suggest the ETF route. You can have ETFs for all indices. It is a matter of time.




Retirement Simplified

(This is from my Moneylife article published in the issue dated 28-09-2006) A primer on planning early for your retirement.


Here is a simple strategy to retire wealthy. The hard part is following it

Today, with starting incomes being fairly handsome, it is possible to have a nice nest egg when you are 50. You can retire early if you choose to, do something on your own or chase your dreams, provided you plan early. All you have to do is to take a fixed amount every month and put it away for a definite time horizon. Do not put away such a large amount that you will be tempted to use it before the time period is over. Save small amounts every month as a discipline. Think of this money as money that you would have spent at a restaurant. Let this minimum not change.

As your income rises, use the extra money to save for other things that you aspire. Even if you can save Rs 2000 every month from the time you are 25 till you reach 50 and assuming a minimal return of 10% a year, you will have over Rs 26 lakh at the age of 50! The amount you have invested is Rs 6 lakh (300 monthly installments of Rs 2000 each). Hindsight is a great thing. As I grow older, I realise that I should have started planning my savings and investments this way, much earlier in life.

Now, comes the question where to invest. I am a great believer in equities. If we believe that, on an average, our GDP will grow even at a rate of 7% over the next few decades, corporate profitability in nominal terms would increase by over 12-14% each year. Ultimately, this would get reflected in share prices. Of course, there would be terrible years in between, but since you would be buying every month, you will finally emerge as a winner. Investing in equities also addresses the taxation angle, assuming that capital gains would remain tax-free. What stocks to select? Assuming that this savings is the minimal amount we put away, the basic objective is to prevent erosion of wealth. I have three choices to recommend, the first one being my preferred one:

1. Choose an Exchange Traded Fund (ETF). ETF represents an index and indices typically include the largest companies that have a track record and reasonable survival prospects. Each ETF unit comprises all the stocks in the index it represents, in the same weight. More importantly, it takes away the decision-making aspect of which stock to omit and which to choose as the ETF automatically adjusts for changes in index components. The transaction costs are minimal and can be bought or sold like a stock. Pricing is real time. The one caveat is to avoid sector based ETFs and stick to a general index like Nifty or Sensex.

2. The second and inferior option is to choose a mutual fund scheme. Transaction costs are higher and the fund is vulnerable to the fund managers’ decisions. There is no guarantee that over a long period, a mutual fund scheme would outperform the index. Globally, it has not happened and there is no reason to believe that it will happen in India.

3. The third alternative is to invest directly in equities. You have to follow a strategy of investing once a year on a fixed date. Limit yourself to a few stocks (not more than 10), but you would have to do a lot of homework about choosing the 10 best and sticking to them over time, subject to periodic reviews. I would choose large established companies that I expect would be in business at least for the next 10 years. Having chosen them, I would divide my money equally among the 10, eliminating any personal bias.
This strategy may sound simplistic and unexciting but believe me, it is remarkably effective.

Keeping eyes open in the stock markets….


(This appears in today’s Deccan Chronicle . Buying opportunities are best when there is some fear and pessimism. Interesting times, though I cannot forecast the waiting period. Typically, commodity stocks take a long time after peaking, to bounce back. First they have to crack hard then stagnate before the next round of optimism takes them up. )


The market is a great teacher.  There is a list doing the rounds on the social media. It shows the percentage of loss in share price from their highs. Many of the popular stocks have lost between thirty and sixty percent of their price.

These are mostly small cap and mid cap stocks. They climb up rapidly and drop down as easily. Your state of mind depends on when you got in. And when they are first ‘discovered’ they are in short supply. Someone has slowly accumulated the free float and then it keeps shooting up as the only persons who show interest in the stock are ‘buyers’. So, on its journey after discovery, “Upper Circuits” are the norm. The second lesson is that exit from these stocks is an art. You have to sell when there is optimism and people are screaming to buy it. When the tide turns, and everyone is a seller, there is obviously no buyer. These small stocks have a few thousand shareholders at best and there is no institutional interest. So, when everyone is a seller, the “Lower” circuits come in to play. Thus, your timing of entry and exit are both critical. Even mutual fund managers have not got it right. Their fear is that they accumulate large volumes and when they come to sell, it won’t get absorbed.


Very often, the decline in the mid caps also is a signal of the end of a commodity cycle. Those magnificent doubling of profits / sales every year or Q on Q secular growth etc are at some stage going to halt. Once the trend peaks, the next step is for earnings to decline, till many players go in to the red. This is a normal cycle. Each time there is an upturn, there is a new story and each one thinks “this time, it is really different”. Six months ago, no one would even have thought about any price actually going down, forget losing twenty to sixty percent.


And have the prices come to desperately attractive levels? My view is, NO. Nothing has become cheap. Most cases, very expensive has come down to expensive. And even that may not hold good as earnings will very likely show smaller numbers.


For a change, the FII money seems to be trickling out. However, the strong domestic inflows have been kind of holding on so far. While the bigger indices have not shown much decline, the smaller ones have lost considerably.  Clearly shows that the smaller company space is losing steam.

Let us flip the coin. Is it time to buy? What if the stock price has gone below its ‘fair’ value as we estimate? For example, we discovered that a mid cap stock “XVL” has historically (last 10 years) traded in a Price to Book range of 1.2 to 4 times. So, if it comes to near 1.2 times or below, should we be buying? Logic says, we should buy. The only caveat is that we cannot look for a quick return. For that, apart from business cycle, investor moods have to change. That time frame is generally unpredictable. Looking at the commodity cycles, perhaps the best is behind. Results will get weaker. New capacities are being planned by those companies that can find the money. Interest rates are on the way up.


So buying now may be fine as far as price goes. However, given the circumstances, your wait could be long. And it is likely that when the sector or company revives and investment climate improves, the returns could be exponential. The important thing is to make sure that the company we have identified will hang in there and do business as we expect it to. It is better to be frugal and not take 100% of our planned exposure right away. You could get more juicy opportunities. However, if you make a list of five or ten small companies which you like, you can keep a checklist and slowly put money in to them in instalments. Do not chase every stock. Do not say ‘yes’ to the first opportunity that comes your way. If we understand business cycles in a commodity, it helps. Dig data from the past and see how much time gets spent at the bottom of a price chart.

The other caveat is not to be anchored to recent highs and lows but to stick to a process and method. Do not violate that. There are companies that lost 70% between 2008 and 2009. And from there lost another seventy.